Hall v. Commissioner, 94-2 USTC ¶ 50,392 (10th Cir. 1994)
Background. Federal law treats ministers in a very unique way for purposes of social security coverage. Consider the following 2 special rules:
- Self-employed status. All ministers are treated as self-employed for social security purposes with respect to services performed in the exercise of their ministry. There are no exceptions. This is an absolute rule. As a result, ministers pay the “self-employment tax” (the social security tax on self-employed persons) not “FICA taxes” (the social security tax on employers and employees).
- Exemption. Ministers may apply for exemption from self-employment (social security) taxes with respect to service performed in the exercise of their ministry if they are opposed on the basis of religious convictions to the acceptance of social security benefits and file a timely exemption application (Form 4361) that is approved by the IRS. The due date for the exemption application is the deadline for the federal tax return (Form 1040) for the second year in which the minister has net self-employment earnings of $400 or more, any part of which comes from ministerial services.
Can ministers ever again be eligible to exempt themselves from self-employment taxes after the deadline for filing the exemption application has expired? That was the question addressed by a federal appeals court in a recent decision.
Facts of the case. A Methodist minister was not opposed to accepting social security benefits on the basis of his religious convictions, and did not submit an application for exemption from self-employment taxes before the deadline for doing so. He later left the Methodist church, entered into secular employment for 5 years, was reordained by another church and became a pastor in his new faith. He then submitted an exemption application which was denied by the IRS on the ground that it was filed too late. The minister appealed.
The court’s decision. A federal appeals court ruled that the period of time during which the minister had to file an application for exemption from social security started all over when he
- left the ministry for 5 years
- converted to another faith
- was reordained by his new church
- developed religious-based opposition to accepting social security benefits based on his new faith, and
- filed a timely exemption application after being reordained
The federal court’s recent decision will not open the floodgates to other ministers, except in rare cases. The decision applies only to those few ministers who change their church affiliation, are reordained, and develop an opposition, based on their new religious convictions, to the acceptance of social security benefits. Few ministers will satisfy these requirements. The ruling will not apply to ministers who do not change their church affiliation or doctrine. Ministers who did not file an exemption application within the prescribed period, and who have served a local church for several years, are not given a second chance to opt out of social security by this ruling.
Relevance to church treasurers. What is the significance of this ruling to church treasurers? Consider the following:
- Self-employed status. The ruling confirms that ministers are always treated as self-employed for social security with respect to their ministerial services. This means that they pay the self-employment tax. Church treasurers should not withhold FICA taxes from the wages of a minister. This is incorrect and can lead to problems.
Example. First Church treats its minister as an employee for federal income tax purposes. The church treasurer assumes that FICA taxes must be taken out of the minister’s wages since the minister is treated as an employee for income tax purposes. This is incorrect. Ministers always are treated as self-employed for social security with respect to their ministerial services—even if they report their income taxes as an employee. As a result, they never pay FICA taxes on church compensation. They pay the “self-employment tax,” which is the social security tax (15.3%) imposed on self-employed persons.
- Counseling the younger minister. It is helpful for church treasurers to be informed as to the basis for the ministerial exemption from social security, and the deadline for filing an exemption application. This information will enable church treasurers to counsel younger ministers who may be considering opting out of social security. Many younger ministers decide to exempt themselves solely for financial reasons (to avoid paying the 15.3% self-employment tax). Many receive erroneous advice from financial planners or insurance agents. Church treasurers are in a unique position to counsel younger ministers. Here are the points that should be made:
• Basis for exemption. Ministers are eligible for exemption from self-employment taxes, but only if they satisfy several conditions. One condition is that the minister is opposed on the basis of religious convictions to the acceptance of social security benefits based on ministerial services. Very few ministers satisfy this extraordinary requirement. Many may be opposed to paying excessive taxes, but how many can say they are opposed on the basis of religious convictions to accepting social security benefits?
• Deadline for filing the exemption application (Form 4361). An application for exemption must be submitted by the due date of the federal tax return (Form 1040) for the second year in which the minister has net self-employment earnings of $400 or more, any part of which come from ministerial services. This deadline is not extended because a minister belatedly develops religious-based opposition to accepting social security benefits. There is only one possible exception that was addressed in this article—the deadline may start all over if a minister experiences a change of faiths, is reordained in another church, develops a religious-based opposition to accepting social security benefits, and files a timely exemption application after being reordained.
• Exemption is irrevocable. Church treasurers should advise younger ministers that an exemption from social security is irrevocable. Ministers who opt out of social security cannot assume that they will someday be able to re-enter the system.
• Insurance coverages. The church treasurer should inform the younger minister of the many advantages of social security coverage, including retirement benefits, survivor benefits, disability benefits, and Medicare (hospital and medical benefits at age 65). These are significant benefits that are forfeited by a minister who opts out of social security (unless the minister has enough years of secular employment to be fully covered). If the church does not make some or all of these coverages available through private insurance, the treasurer should so inform the minister.
This article originally appeared in Church Treasurer Alert, November 1994.